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Schroder Balanced Fund

The Schroder Balanced Fund is a multi-asset portfolio investing in a selection of Growth (typically shares and property securities), Diversifying (typically higher yielding debt and alternatives) and Defensive (typically investment grade debt securities and cash) assets, with the investment objective to target a return above Australian inflation (before fees) over the medium to long term.

The Schroder Balanced Fund is an investment strategy which adopts a traditional multi-asset investment approach. The strategic asset allocation is formulated with Schroders’ proprietary medium term asset class return projections and risk expectations. Investment allocations are adjusted for shorter term considerations to derive the most suitable tactical asset allocation to add value and manage risk. This is complemented further by active security selection within asset classes to generate excess return relative to the benchmark indices.

A multi-faceted risk management framework is incorporated in the decision making process to manage volatility and mitigate inherent downside risks within the Fund. The resulting portfolio is diversified across a broad array of assets and securities, with strong emphasis on delivering the objectives with an acceptable level of risk.

Investment objective

To deliver an investment return before fees of 5.0% pa above Australian inflation (before fees) over the medium to long term. Inflation is defined as the RBA's Trimmed Mean, as published by the Australian Bureau of Statistics.

Benefits

Long term objectives

The investment objective is to deliver a return above inflation over the medium to long term. In recognition that investors prefer relatively stable returns over time, an emphasis is placed on risk taken to achieve this objective.

Traditional asset allocation framework

The Fund incorporates Strategic Asset Allocation based on a long run absolute risk-return framework. Consistent with the investment objectives, the Fund incorporates Tactical Asset Allocation shifts to factor in shorter term considerations. Within asset classes active security selection is also employed to target excess returns above relevant benchmark indices.

Focussed risk management

Recognising that risk is multi-faceted, we seek to allocate and manage risk in a number of different ways, including via the allocation of volatility as well as ensuring potential downside risk is effectively managed.

Transparent and liquid

The Fund’s investments are held predominately in traditional assets with no leverage, and with strict limits on exposure to liquidity constrained alternatives.

Dedicated investment team

Dedicated and experienced investment team of 14 fixed income and multi-asset professionals. The portfolio management team has an average experience of 20 years with clear accountability*.

Well integrated into the broader Schroders’ Global Multi-Asset Group, delivering truly diverse global coverage of investment ideas, research and implementation in key regions and asset classes.

Key Risks

Market risk: includes the risk of volatility and negative returns arising from investment markets.

Equities risk: includes the risk that changes in share prices will negatively impact on the value of investments.

Interest rate/duration risk: The performance of fixed interest and debt securities will be sensitive to movements in domestic and international interest rates (e.g. increases in interest rates result in the capital value of fixed interest investments falling).

Credit risk: Credit risk arises when an issuing entity defaults, which results in a loss of capital to the Fund.

Identifying the right assets to own and when to own them is the most important step in the investment process as it will have the greatest impact on the overall return and risk characteristics of the Fund.We believe that the strategic asset mix is the most important determinant of return over time and this forms the core of our process. Given that most investors buy a balanced fund to deliver relatively stable returns over time, the strategic asset mix should be set with the focus (to the extent possible) on the outcome rather than the market conventions that guide the composition of a typical balanced portfolio.

The development of medium term return projections for the universe of assets available to us is the first step in this part of the process. These projections should be consistent with the broad environment expected to dominate over this forecast period. The formulated returns are optimised within our proprietary system to develop an appropriate SAA that is both efficient from a risk and return perspective while satisfying conventional market requirements for a “balanced” fund.

Tactical Asset Allocation (TAA) – Active risk allocation

We view TAA as an important risk management tool which is tasked with managing the amount of active risk we are taking within the portfolio and where this risk is best allocated. While the prime determinant of total fund risk is the SAA, the amount of active risk (or tracking error risk) is a function of both the extent to which the portfolio asset weights differ from benchmark (or TAA) and stock selection within the underlying portfolios.

Central to the TAA task is a need to identify those assets where, at current pricing, there is a high probability that short run returns will be materially different from our medium term expectation. Our approach to TAA combines a disciplined analytical framework with a qualitative overlay. A key element of our approach is the framework we use to manage active risk and thereby evaluate and determine TAA positions. This is based around an assessment of three important drivers of asset market behaviour - valuation, cycle, and liquidity.

By considering these factors in a disciplined and consistent framework, we are able to form a view as to the likelihood of asset returns varying (vis-à-vis our strategic return assumptions), which will drive the tactical over- or underweight allocation. The exact size of the positions within the Fund will vary between asset classes based on the asset class contribution to active risk (or tracking error).

Security Selection

Differing asset classes have their own unique set of fundamentals, which drive relative performance within the asset class. The management of each asset class is delegated to the respective specialist teams, predominantly within the Schroders Group, to determine appropriate positions to be taken within the asset class. These views are based on investment processes, customised for each local market, asset class, and investment style.

Risk Analysis & Mitigation

To better understand what the risks in the portfolio are and where our risk mitigation strategies need to focus, we apply a broad series of tests to the portfolio, mainly utilising our proprietary system. These include statistical risk, factor risk, scenario testing and common sense.In managing these risks our approach falls into two areas. The first involves ensuring the portfolio is properly diversified. The second involves the use of targeted strategies such as the purchase of insurance (options) or the implementation of specific hedging strategies to remove or mitigate specific risk events (or tail risks).

Portfolio construction and implementation

The Portfolio will utilise a broad spectrum of investment opportunities which favour liquid and transparent investments that are marked-to-market. We will consider investing in less liquid markets to capture an illiquidity premium, provided it is appropriately priced and sized. A range of options including active and passive strategies, direct investments, unlisted unit trusts or derivative exposures are considered to achieve the best implementation outcome.

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